Surge in oil prices dims India budget aim

The country’s credit risk and debt costs for state refiners are climbing from the lowest levels since mid-2011 after crude in New York surged 15% in the past quarter.

Updated: Sat, Feb 09 2013. 12 55 AM IST

Singapore/New Delhi: A three-month surge in oil prices toward $100 a barrel is undermining the bond market’s confidence in India’s plan to cut fuel subsidies and narrow its budget gap.

The nation’s credit risk and debt costs for state refiners are climbing from the lowest levels since mid-2011 after crude in New York surged 15% in the past quarter. The cost of insuring against non-payment of State Bank of India’s notes, seen as a proxy for the sovereign, has climbed 13 basis points (bps) from 191 on 9 January. Credit default swaps for China rose 7 bps to 68. The yield on the 2021 debt of Indian Oil Corp. Ltd has added 16 bps from 3.95% on 24 January.

Costlier oil is threatening finance minister P. Chidambaram’s plan to pare energy subsidies by 17% and cap the budget deficit at a five-year low, as he boosts efforts to avert a sovereign rating downgrade. Higher fuel expenses may feed the fastest inflation among the largest emerging markets and extend the rupee’s 25% tumble in the past five years, raising the risk of voters’ ire before next year’s elections.

Brent crude traded in London, a benchmark followed by Indian refiners, advanced more than 10% in the past three months to $117.85 a barrel. The nation’s monthly petroleum imports averaged $14.6 billion last quarter, up from $13.1 billion in the preceding period, according to official data.

The shortfall in India’s current account, the broadest measure of trade, widened to a record $22.4 billion in the three months ended 30 September, the most recent central bank data show. The gap in public finances was 5.8% of gross domestic product (GDP) in the fiscal year through March 2012, after the government missed a target to narrow it to 4.6% amid rising subsidy payments.

The two deficits fuelled a decline in the rupee to a record low of 57.3275 per dollar in June, and prompted Standard and Poor’s (S&P) and Fitch Ratings to cut their outlooks for India’s debt rating to negative in the first half of 2012. The local currency declined 0.6% during the week to 53.5050 per dollar in Mumbai, the biggest drop since the five days through 21 December, according to data compiled by Bloomberg. Both the rating companies rank India at BBB-, the lowest investment grade. S&P said in a report in December that the nation faces at least a one-in-three likelihood of a downgrade.

Chidambaram said on a tour of Asia and Europe to woo investors in January that fiscal prudence will be a key theme of his budget this month.

India’s patchy performance on policy implementation, and the approach of elections in 2014 could impede fiscal consolidation, Art Woo, Hong Kong-based director of sovereign ratings at Fitch, said in the statement. The Union budget will be an important gauge. Political and implementation risks remain significant.

State refiners sell diesel, kerosene and cooking gas below cost to help curb inflation. The government compensates the companies for such losses, which totalled Rs.738,20 crore in the last three quarters, while oil producers including Oil and Natural Gas Corp. Ltd give discounts on crude.

India plans to trim its subsidy bill for food, fuel and fertilizers to Rs.1.9 trillion, or 2% of GDP, this fiscal year from 2.4% in the previous period, finance ministry data shows.

As part of an economic policy overhaul that started five months ago, India let oil firms to raise retail diesel prices on 18 January for the first time since September. They will be allowed to increase rates by as much as Rs.0.50 every month until the deficit from discount sales is wiped out, oil minister M. Veerappa Moily said on 20 January.

“If crude oil prices continue rising, it’ll erode the benefit of planned monthly diesel price hikes,” said Mayur Patel, a Chennai-based analyst with Spark Capital Advisors, who has a sell rating on the three state-run refiners. Prices may be increased gradually for a time, but we expect at least a no-hike window of five-six months before the next general election. Bloomberg